Fed puts kibosh on rate shenanigans

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The Federal Reserve just issued more than 1,100 pages of clarifications about the the Credit CARD Act, which goes into effect next month. A handful of the clarifications revolve around sneaky interest-rate tricks in which the banks currently engage. Fortunately, many of the Fed's notes clarify things in favor of the consumer. This CNN/Money article touches on some of the big ways you'll be affected by the CARD Act when it comes to interest rates.

The CARD Act strictly limits the circumstances under which credit card companies can raise your interest rate on existing balances on fixed-rate cards. The rules are a little looser on variable-rate cards, which a lot of issuers have been strong-arming consumers into accepting. They've been doing this by basically saying, "Take this variable-rate card, or we're going to skyrocket the interest on your fixed-rate card." When faced with these alternatives, it's no wonder many people took the variable-rate option. Variable rates would be especially good in theory right now, except that banks have cooked up yet another (also soon-to-be-outlawed) catch to make more from them.
For those of you who don't have one or haven't read the fine print, variable-rate cards use the prime rate (the rate set on the overnight lending market), plus a certain percentage. Since the prime rate is at a historic low right now, this would seem to be a good deal. But what card issuers have started doing is creating what's called a "floor," below which the rate you pay will not drop, even if the prime rate does.

Sound confusing? It's not. Say you have a card that charges an interest rate of prime plus 5%, and say prime is hovering around 3.5%. This would give you a rate of 8.5% -- not bad in this market, except that the issuer might have a floor of 10%. So you pay whichever is higher, whether that's the 10% you're stuck paying now or the who-knows-what you'll be stuck with once the prime rate zooms up (which it will start doing when the Federal Reserve eventually raises interest rates). The new Fed clarifications put the kibosh on this rate-switcheroo.

"They did what we asked them to do, which was stop these deceptive floors that appear when interest rates are headed down," Linda Sherry, director of national priorities for advocacy group Consumer Action, told WalletPop in an interview. "But you can't have it both ways," she said of card companies' sticking customers with the higher of two rates. "It was an anti-consumer practice, and I'm very glad it's been addressed."

The Fed has also outlawed another move that was popular among issuers but infuriated consumers. Previously, if you had a card with an interest rate of a certain amount plus prime, your card issuer could pick the highest rate prime hit over a period of as much as a few months, then slap you with that even if prime had come down since then. Starting next month, credit card companies won't be able to do that on existing balances at all, and they'll have to give you 45 days' warning if they try it in the future.

Consumer Action's Linda Sherry says the good part about this guideline is that it gives consumers a clear idea of what to expect. "It has to be spelled out, and it can't be ever-changing," she said of rate fluctuations. Credit cards and their terms and conditions have become so complex -- many consumer advocates think deliberately so -- that any efforts to streamline and simplify are welcome.